July 24 Budget was the beginning of real liberalisation in Indian Economy
Anjan Roy
At the launch of his six volume collected works, Dr Manmohan Singh remembered his days as finance minister. He had observed, he was not only an “accidental prime minister”, as some people had written, but he was “an accidental finance minister as well.”
That was a fortunate accident for the country, since no one was better able to steer the economic reforms programme ushered in thirty years back. Shrewd as he was, another one can say accidental incumbent, P.V Narasimha Rao, had brushed aside the claims of others like Pranab Mukherjee, who had served as finance minister of Indira Gandhi.
It is difficult to reconstruct the world that was some thirty years back. Back then, India was not in the list of world's economic heavyweights. It was still a struggling country barely able to make ends meet.
On top, thirty years back, India was faced with its worst economic crisis since independence. The most urgent one was one of maintaining India's credibility as a solvent nation. The foreign exchange reserves had dropped to barely $1 billion, not enough to meet one week's imports, let alone repaying several large dues with were coming up.
The Chandra Shekhar government had earlier been pulled down by Rajiv Gandhi and in the ensuing election campaign the Nehru-Gandhi scion had been killed. The election had given a fractious verdict, and it was the semi-retired Narasimha Rao who was thought to be a comfortable fit as prime minister.
No one could foresee he, along with Manmohan Singh, would change the colour of Indian economy from the ochre of Left-of-centre Nehruvian socialism to the black and white of free market competition. The duo had been able to dismantle one of the most rigidly regulated and controlled economy to relative freedom of market determined efficiency.
As finance minister, Narasimha Rao's first choice was Dr I.G. Patel, once RBI governor and a world renowned economist. Patel had then just settled down in his hometown in Gujarat after a peripatetic life and refused to budge from there.
He suggested Dr Manmohan Singh, who had by then occupied almost every possible position of economic policy administrator of the government from being RBI governor to member secretary in the Planning Commission. He was also the economic adviser to ex-PM Chandra Sekhar. Narasimha Rao contacted him through P.C. Alexander, who had dropped in his home and woken him up from his sleep after a long flight from Geneva.
Such was the fluid scenario then, when on July 24 1991 Dr Manmohan Singh presented his maiden budget. Manmohan Singh's 1991 budget had become the stuff of folklore for economists, more so, for the ringing commendation lines of his budget speech, which we will refer to later.
The Narasimha Rao government was sworn in on June 21. In the following month preceding the budget, some of the most seminal reforms were introduced which guided the course of the Indian economy since.
These were most critical steps for resetting the Indian economy in the midst of that crisis. Devaluing the Indian rupee was not least of these.
Devaluation of the rupee was a hyper sensitive matter. An earlier devaluation in 1966 had proved it. The exchange Is somehow linked in popular mind and political strategy with national honour. Hence, any depreciation in that is considered a national dishonour.
Dr Singh felt correcting the highly inflated exchange rate was the first requirement. Anticipating trouble, Manmohan Singh had thus cautioned his prime minister that the issue should not be referred to union cabinet and rather be handled straightaway.
He had prepared a handwritten note on devaluation and got it cleared from the prime minister, who had advised a gradual and softer approach.
To soften the blow, Dr Singh suggested a two stage devaluation — the first should be relatively smaller and the next slightly bigger. I still recall the flutter that the first devaluation had caused. Unbeknown to us then, the prime minister himself had developed cold feet after the first stage devaluation and instructed FM to hold back the second dose.
Fortunately, by then the deputy governor in RBI in charge of foreign exchange, Dr C. Rangarajan, had informed Dr Singh when he had called up in the morning of June 3 to postpone the second, that deed is done. He had already “jumped” he informed Dr Singh, Montek Singh Ahluwalia recalls most interestingly in his memoir. The effect of the combined devaluations would be that of a sledge-hammer blow in two directions.
First, a deep devaluation could finish off the extensive hawala transactions in the Indian rupee, which was rampant then. Secondly, as a corollary, it would be a body blow to gold smuggling. Along with these steps, the finance minister had liberalised gold import norms for incoming international passengers.
Later, when the immediate crisis was over, the exchange rate of the rupee was made fully convertible on trade account, that is, for exports and imports. Making the Indian rupee exchange rate market determined. That made the greatest difference and its good effects are still working out.
The exchange rate reforms had given market linked flexibility between India's domestic economy with the rest of the world. Thus, incentives and scope for gains from extra-market manipulations disappeared and an automatic corrective mechanism was introduced.
The rupee had depreciated from around 16 to a dollar to about 24 to a dollar after the devaluations and market mechanism. What it did was to make imports costlier and exports cheaper. Overall, the demand within the Indian economy shifted from external markets to domestic market.
Much later, during the taper tantrums in around 2014, the flexible exchange rate had some insulated India from the worst financial fall-out.
Along with the exchange market reforms, the new finance minister and his team had also opened up the secondary market in stocks and shares to overseas institutional investors. This started the inward flow of investment dollars. FDI was also liberalised.
The overall impact of these measures was that while in 1991 June-July India had barely $1 billion reserve, in two years the country was seeing a problem of plenty in foreign exchange.
I remember a meeting in the Constitution Club in New Delhi's Rafi Marg, where Montek Singh Ahluwalia, by then finance secretary, was discussing various ways in which the foreign exchange inflows were being sterilised to prevent overall rise in domestic prices.
But then, we have yet to come to Manmohan Singh's first budget and the tortuous process through which the country had to pass before getting over the acute crisis of 1991-92. (IPA Service)
